Apple Computer, Inc.

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Maintaining the Music Business While Introducing iPhone and Apple TV

INTRODUCTION According to Apple Computer's 2007 10-K Annual Report, "The Company is committed to bringing the best personal computing, portable digital music and mobile communication experience to students, educators, creative professionals, businesses, government agencies, and consumers through its innovative hardware, software, peripherals, services, and Internet offerings." The company's 2005 Mission Statement reads: Apple Computer is committed to protecting the environment, health and safety of our employees, customers and the global communities where we operate. We recognize that by integrating sound environmental, health and safety management practices into all aspects of our business, we can offer technologically innovative products and services while conserving and enhancing resources for future generations. Apple strives for continuous improvement in our environmental, health and safety management systems and in the environmental quality of our products, processes and services. In recognition of current market trends, Steve Jobs has claimed that he wants to transform the company by making the Mac the hub of the consumers’ digital lifestyle. Despite Apple Computer's recent successes, the company is facing an ever-changing competitive environment on multiple fronts.
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What are the key strategic challenges facing Apple Computer? What are some of the dimensions along which company success can be measured? What critical external and internal environmental factors have strategic implications for Apple's future? How does Apple's strategy stand up against industry rivalry? What recommendations can be made to enhance the effectiveness of the company's strategy or to change its strategic approach for better results?

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ANALYSIS Key Strategic Challenges Competition and the pace of technological change are the most critical issues currently facing Apple Computer. Its strategic moves into mobile communication devices and portable entertainment downloading places the company in stiff competitive conditions from every angle. New competitors, low-priced rivals, and potential substitute products all threaten to reduce the perceived value of Apple products and the success of its strategy.

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investors.2 . Perspective Financial Criteria  Revenues by product and region  Cash flow . vision. which has its own competitive forces. suppliers. Managing the sometimes-conflicting expectations of customers.marketing. Apple’s continued success lies in careful and thoughtful strategic management of these complex issues and challenges. the company's suite of products is no longer based on its internally developed hardware and software. The following criteria provide a set of measures to effectively determine the company's success. and public communication and relationshipbuilding skills puts Apple at risk without a reliable succession plan and a pool of equallytalented brand champions. Success Factors A balanced use of financial and strategic controls will help ensure that Apple Computer both benefits from feedback on past performance and communicates the important drivers of future performance. And the company's dependence on Jobs' charisma. In addition. With Apple's success and growth. It is uncertain whether Apple will be able to sustain its brand's reputation for innovative design.amounts and sources  Net income  Debt  Market share  Growth  Customer satisfaction      Customer Internal Business Processes Learning and Growth     Cost management for pricing flexibility Margins Inventory control Product quality Advertising/marketing effectiveness New product introductions Technological breakthroughs Research and development investments Training and cross-organization sharing programs Apple . and new sets of competitors have a wider variety of strengths and strategies. Its customer base is now more diverse. dimensions of entertainment value. innovation. The technology and entertainment industries are constantly and rapidly changing.Apple Computer. continually release technological breakthroughs. and brand management . legal/governmental entities. and launch new products that will "hit the consumer mark”. but depends upon the ability to secure media content. relationship building.: Maintaining the Music Business While Introducing iPhone and Apple TV Apple is also challenged to maintain its core competencies . partners. and proprietary issues. balancing stakeholder demands has become increasingly difficult.as it manages a broader range of products and navigates more markets. and other stakeholders puts an increasing amount of pressure on Apple's management team. Inc.

computer and digital music format .the profit machine Marketing competence .iPhoto.marketing partnerships iPod platform . and brand management.niche audience Customer relationships . iMac Internal software and hardware development .ease of use.strong sales.: Maintaining the Music Business While Introducing iPhone and Apple TV SWOT Analysis One of the most important stages of the strategic management process is the situation analysis.users want compatibility Profit per song is low 1% share of mobile phone market Less than 5% of the computer market Unpopular Apple TV features Dependence on Steve Jobs for his personality. high quality format . negotiating prowess.Apple Computer.responsiveness to customer feedback Positive brand image. which involves an in-depth assessment of forces in the external and internal environments that can impact the success of the company's strategy over time. controlled inventory Weaknesses Historically incompatible software . An internal assessment identifies core competencies which will support the implementation of chosen strategies and company shortcomings which might interfere with strategic plans. Inc.clear product differentiation Suite of products for range of applications . includes counter-cultural appeal Strong financial performance .stream of new product releases Product design and features . Significant strengths and weaknesses uncovered by the internal environmental analysis are summarized below.reputation for brand development which gains customers through well-planned and carefully executed marketing strategies Extensive content access based on valuable partnerships in the recording industry Innovation skills and creativity .R&D Devoted base of customers . iTunes.largest market share (70%) of the digital music market (nearest competitor only 8%) due to first mover advantages in portable digital music industry Control over supplier and distributors Product sales Strategic alliances . iMovie. an analysis of the firm environment focuses on the resources and capabilities within the company which strategies can be based upon. alliance building (based on expansive relationships built by Jobs throughout the external environment). Apple's core competencies include marketing (including the ability to develop appealing designs). vision. low debt. and net income. Internally. cash flows. innovation (enabled by research and development). and relationship skills Need to build management team and conduct succession planning Apple .3 . Strengths iPod .

viewing screen. Apple currently dominates this market. Inc. However. wireless functionality. retaining a competitive advantage based on superior innovation and solution integration of hardware (personal computer and iPod). A close look at Apple's competition reveals that the company is confronted by aggressive opposition in all areas of its business. A multitude of existing and new competitors is poised to battle for market share and requires continuous attention from the company's leaders. and content distribution (iTunes Store and iTunes Wi-Fi Music Store). storage. simpler. service and support. iPod specifications which influence purchase decisions include battery technology and life. size. quality. related software and peripheral products. Other than price. personal computers. And over the past several years. encoding format/technology. availability of software and peripherals. iTunes competes along the following dimensions: media compatibility. product quality and reliability. digital electronics. including some who offer free peer-to-peer music and video services. storage capacity. supported digital formats. Apple . feature. and corporate reputation. The company’s music products and services also face significant competition from firms promoting their own digital music and content.4 . installed flash memory. price. and mobile communication devices are intensely competitive. alternative (even substitute) devices are becoming increasingly smaller. The markets for consumer electronics. and other online features. product type. marketing and distribution capability. These devices compete for market share with Apple's desktop and laptop computing products. resolution quality. software inclusion. digital music devices and related services. which have substantially increased the capabilities and use of PC's. a variety of new products with competitive price. Probably most threatening to the company's position is potential collaborations between competitors and content providers to offer integrated solutions that produce more value or exclude Apple from access to content. software (iTunes). the competitive rivalry in this arena is expected to intensify as competitors imitate Apple’s approach and tightly integrate their own offerings to appeal to consumers. design innovation. This puts continuous downward pressure on Apple's margins. relative price/performance. and mobile communication devices. price (monthly subscription or per song/album). As a result. touch pad. As the industry and its customers become more reliant on Internet connectivity. and technological breakthroughs. They are characterized by rapid technological advancements.Apple Computer. and performance characteristics are being introduced into the marketplace. content sources. weight. price competition in Apple's main product markets has been particularly zealous. It is common for competitors selling personal computers based on other operating systems to aggressively cut prices and accept lower product margins to gain or maintain market share.: Maintaining the Music Business While Introducing iPhone and Apple TV External to the company. search and preview functions. and less expensive than traditional PCs. availability of downloadable materials. control precision. selection (content agreements). key competitive factors in the computing market include product features. Apple's most pressing challenges emanate from the industry and competitor environments.

Price sensitivity on the part of consumers is very strong.) To gain an edge.: Maintaining the Music Business While Introducing iPhone and Apple TV The risk of new entrants is also high in both the player and music service businesses. well-funded. downloading. which is now operating as a Blockbuster subsidiary). affordability. In fact. In addition. attempting to secure content contracts for Apple TV will meet limited success. Movielink. the market that Apple TV is entering (with mobile media. such as Casio. and unless agreements benefit their distribution objectives and maximize the value of their releases. and manufacturing-ondemand services. broad access and selection. and video download industry segments) introduces even more management complexities and promises greater competitive challenges than Apple Computer has experienced in the past. Powerful partnerships. Film distribution has exceedingly more platforms for reaching the audience. The company's entrance into the mobile communications field with the introduction of its iPhone has placed Apple in another highly competitive industry. new competitors are likely to enter because of low barriers to entry. Apple's exclusive use of Cingular/AT&T does not prevent the phone service provider from entering potentially harmful agreements with the company's competitors. Apple's dominance and relative power in the music industry (as well as Jobs' reputation for control) may build resistance among film producers who are accustomed to maintaining their own levels of control over content. Even new entrants. rental. established consumer electronics companies. with substantial resources to pursue joint efforts. and direct delivery to the viewing device. set-top box systems. particularly from large. NBC's decision to contract with Amazon-TiVo demonstrates the industry's independence of thought and potential obstacles to Apple's strategic approach.Apple Computer. evolving design approaches and technologies. The primary barrier is capital. Inc. and experienced competitors operate. such as its threatening relationship with rival Palm. Due to the success of the iPhone and the Blackberry. and even that is not high enough to discourage organizations with available resources. The company's ability to Apple . pose substantial hurdles to competitors by offering what appears to be the "cure-all" for the video-on-demand market. subscription. Sony and Toshiba (for players) or from on-line companies like Yahoo and Microsoft or retailers like Virgin Music (for downloads). And the speed with which information about new technology spreads enables start-ups to gain legitimacy in the industry very quickly. and rivalry is especially fierce in this market. Given the attractiveness of these markets. New entrants also pose formidable opposition to Apple in the mobile phone market. such as Vudu. where several large.5 . Finally. have already been established (such as the joint venture between five of the top movie studios. delivering immediacy. studio executives are much more aggressive about protecting content rights. (Motorola has been the undisputed leader for years. The notable acceptance and gains made by RIM's Blackberry demonstrate the potential of new entrants to increase rivalry. and multiple competitive segments have already emerged to offer access to content through mail. competitor behavior is characterized by aggressive pricing practices. set-top box. frequent product introductions. and rapid adoption of technological and product advancements by competitors. In addition. other producers will undoubtedly attempt to imitate their appealing features and functional applications in order to create customer value and compete effectively with their own smart phones.

this industry is not structured as simply as the music industry.: Maintaining the Music Business While Introducing iPhone and Apple TV successfully apply its iPod/iTunes model to this competitive field is still uncertain.Apple Computer.brand exposure International growth and expansion Upgrades for installed music base Improve compatibility Licensing brand name with accessory manufacturers Web technology and marketing New ways to integrate electronic devices and change the way they are used in customers' daily lives Product line extensions and new content distribution systems Consumer demand for "custom" features More customer programs Consumer image consciousness Strategic partnerships .cooperative marketing Growth in new user segments Complementors to interaction Consumer/corporate needs merging . But in all certainty. Opportunities Retail stores .tools and features to appeal to alternate markets Threats Apple did not have an easy time finalizing contracts with movie studios that will allow Apple to sell movies on iTunes for use on the iPod and Apple TV Strong competitors for iTunes market share . Very large competitors with good reputations and extensive resources Pricing pressures as products mature and competition increases Inability to please more diverse customer base Inability to continue marketing success for broader range of products for mainstream customers Technology and entertainment industries are constantly and rapidly changing Collaborations between competitors and content providers GotVoice (Web-based free subscription service records voicemail messages in MP3 format and sends to e-mail accounts for discretionary review) rivals iPhone’s Visual Voicemail and is not limited to cell phone devices.6 . and cross-industry integration Apple .S. The table below summarizes important opportunities and threats existing in Apple's external environment.Wal-Mart number one online music retailer in U. Inc. and relationships with key content providers are absolutely essential to gaining a competitive edge. giving it an advantage New entrants from backward. forward.

reseller agreements. Inc. and mobile communications. The company continually re-invents itself to enter new product categories and avoid price competition in maturing product markets. and innovative co-branding arrangements play a critical role in supporting the company's differentiation strategy.7 . and technologies across product lines. application software. powerfully linking the success of strategic partners together. immediate success can be found in many different cultures and societies. In today's business environment.Apple Computer. Apple's strategy also involves the pursuit of opportunities to create demand for its products in the global market. For high-tech products like the iPhone. wireless carrier contracts. Related diversification allows the company to share resources. Apple focuses on revealing radical concepts and appealing designs to making its products different. In an industry of low profit margins and cost cutting. Marketing begins with simple and aesthetic product design. operating and selling beyond the home market can enhance the company's ability to compete with major rivals and bring knowledge into the organization to expand its pool of innovative ideas. and the company plans to achieve similar results in video distribution and mobile phone connectivity. The impact of downward pressure on prices can be minimized when alternative markets are discovered. and innovative industrial design. affiliations with other strong brand names serve to increase Apple's marketing exposure and build consumer confidence. hardware. Apple's valued supply chain relationships. digital consumer electronics. Apple seeks to change the way people behave rather than just competing in the marketplace for traditional products or with incremental innovations. it is common to expand into international markets when domestic markets mature and commodity pricing tactics infiltrate the industry. Apple . Product refinement and development now aims at capitalizing on the convergence of PCs. Additionally. which generates viral customer interest in Apple products. and the transfer of skills and intangible core competencies can build a competitive advantage that is difficult for rivals to emulate. The company's strategic alliances have provided an effective avenue for gaining sizeable market share.: Maintaining the Music Business While Introducing iPhone and Apple TV STRATEGY Apple Computer’s business strategy leverages the company's unique ability to internally design and develop operating systems. Also. While competitors seek to imitate Apple's successful products and the innovative complementary relationship between iPod and iTunes. seamless integration. Its differentiation increases brand loyalty and reduces price sensitivity. Apple continues to introduce ground-breaking new products timed perfectly to achieve first mover advantages. and services to deliver superior new products and solutions which are differentiated by their ease-of-use. Identifying emerging trends and exploiting the advantages of early market penetration has been fundamental to Apple's revolutionary success in the distribution of music. activities. Using the company's core competencies in different product markets (employing a mulitproduct strategy) decreases Apple's dependence on revenues from a single market.

the quality of its marketing strategy. consumer electronics. it will remain important for Apple Computer to be fanatically protective of the Apple brand image and adequately invest in the company's competitive advantages in innovation and marketing. and videoon-demand businesses. However. mobile communication devices. or joint development projects (such as its Visual Voicemail project). the company's innovative capabilities.: Maintaining the Music Business While Introducing iPhone and Apple TV RECOMMENDATIONS The Apple brand. If Apple miscalculates or fails to produce commercially viable innovations to enter the market as a first-mover. systems software. the company should consider expanding its range of product offerings and intellectual property through licensing. consumer electronics products. and services related to consumer electronic devices in each product market.Apple Computer. Continually invest in research and development to stay ahead of and lead radical product and technology discoveries. mobile phone. The analysis reveals that.] • Maintain and upgrade design appeal to reduce the prospect of new entrants. • The company needs to constantly assess if it is moving away from internal strengths or extending its reach too far beyond its known and manageable markets. and technologies to the marketplace. and mobile communication industries are characterized by rapid technological advances. acquisition of businesses or technologies. [The company’s future financial condition and operating results are substantially dependent on its ability to continue to develop improvements to the Mac platform and to Apple's hardware. and maximize value. networking and communications software and solutions. software. Inc. applications software. the company’s ability to compete successfully is heavily dependent upon a continual and timely flow of competitive products. services. Apple's commitments and actions should be integrated and coordinated to exploit the company's core competencies. to secure strategic success. • Apple . strengthen its competitive advantage. • • • Carefully manage brand exposure. Apple needs to know when to engage in planned obsolescence to take advantage of the company's market leader status. and continued success in building strategic partnerships are likely to determine the outcome of the company’s forays into the music. and Internet services and solutions) will maximize the value and the life of products.8 . Some suggestions for achieving this include: Only cautiously engage in the low-end of the market which can tarnish Apple's reputation as a technology leader. • Enhancement of existing products in all areas (computer hardware and peripherals. Because the personal computer.

Inc. It is also important to pay attention to the needs and objectives of strategic allies. and image will increase Apple's appeal to more consumer groups. it is likely that Jobs will soon be stretched too thinly.Apple Computer. major efforts should be made to study the preferences of customers in those regions to make sure that service offerings and marketing efforts are attuned to and targeted to address specific needs in those areas. Apple . Leverage Apple's 70% share in the music market to strengthen the performance of other applications. To revolutionize the Internet video and the smart phone industries (as the company did in the music download industry). In addition. particularly if they can help overcome resistance to Apple's proprietary technology in the mainstream market. quality. Develop the top management team and a succession strategy to reduce overdependence on one individual to advance the interests of the company. and standardized carrier service would make it difficult to differentiate the iPhone from its competitors. complementary products and co-branding opportunities. especially the interests of content providers. if he is not already. Building unbreakable customer bonds (especially through its one-on-one programs and retail "membership" culture) will secure long-term customer loyalty and perpetuate its devoted base of customers. The company wants to establish partners who are as motivated and engaged in Apple's success as internal stakeholders. In terms of the global sector.to maintain pricing flexibility and improve competitive position relative to low-priced competitors.: Maintaining the Music Business While Introducing iPhone and Apple TV Apple also needs to define and reach the customer base more broadly and more deeply. Firms that partner with Apple and provide access to new groups of customers are very important in the company's quest to broaden its market beyond the current installed user base.9 . Some final suggestions to improve strategic success include: • • • Vigilant management of costs . With Apple's growth strategy. Apple's product line can achieve significant benefits from unique. Enhancing security. good media content and unique carrier services are essential and depend on strong relationships with key media and phone service partners. As the company expands its reach into different parts of the world beyond its current locations. A limited number of available movie downloads would significantly diminish the success of Apple TV. The success of Apple's retail stores presents the company with a unique opportunity to "know" its customers' needs and expectations and provides a forum for floating ideas and generating attention. Seeking ways that the power of Apple's market share and brand name can benefit its partners and protect their business interests will demonstrate that relationship terms can offer mutual value for all parties and benefit the industry as a whole. Apple has begun to establish itself as a worldwide player. Expanding the company's distribution network to effectively reach more of its targeted customers and provide them with a high-quality sales and post-sales support experience will serve to increase market penetration.

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